Local Employment Opportunities and Corporate Retention Policies

We study how firms adjust their corporate retention policies to their employees’ local job opportunities. The more similarities between the firm’s labor-skill profile and the local labor market’s—a measure we label LEO—the greater are the employees’ outside options. We show that, when LEO is high, firms grant more rank-and-file stock options, provide a more employee-friendly work environment, and maintain higher financial flexibility. The relation between LEO and retention policies is stronger for firms with high-skill workers and high R&D. Two quasi-natural experiments, the staggered adoption of the Inevitable Disclosure Doctrine and Hurricane Katrina, support a causal relation.